Five steps to financial freedom

Do you rely on someone else to make all the major financial decisions, or have you lost track of your finances? If so, it’s time to reclaim your financial independence.

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Tempting as it may be to hand over control of your money matters to a partner, or to let things slide because you think you don’t have enough time to monitor everything, it’s essential to keep a close eye on your financial affairs. Only that way can you get in control of your money, rather than letting it control you.

Here are our five steps towards achieving financial freedom…

Build your savings

Make sure you save something every month. Even if you can only manage a couple of pounds some months, you are still putting something aside. And if you pick the right accounts you can earn some competitive rates of interest, despite the fact the base rate is still at 0.5%.

The best way to maximise returns is to use your individual savings account (ISA) allowance each year. You can invest up to £5,340 in a cash ISA this year, and the same amount in stocks and shares. Or you can invest the full £10,680 in stocks and shares.

Current cash ISA best buys include The AA Internet ISA which is paying 3.35%. This includes a 12-month bonus of 1.65% so the rate will fall after the first year and you should consider moving your money again at that point. The minimum investment is £500 and the maximum is £5,340 – you can only invest this year’s ISA allowance. Transfers from other cash ISAs aren’t allowed.

Alternatively, Santander's Flexible ISA Issue 3, is paying 3.30% and can be opened with a minimum investment of just £1. However, the bonus on this account is much bigger at 2.80% so you should definitely look to move your money again after the first year.
Halifax’s ISA Direct Reward pays 3% on a minimum investment of £1, and if you are a qualifying current account customer you earn a higher rate of 3.20%. However, you’ll need to hurry if this account appeals, as the offer ends on 18 June.

The ING Direct Cash ISA pays 3.00% annual interest tax-free and this rate is guaranteed for 12 months, but this account is only available to existing customers.

Sort out your current account too. Most of us stick with the same current account provider year after year, but if you’re fed up with how restrictive your account is, it’s time to take charge and move elsewhere.

You don’t have to accept steep overdraft fees or pathetic rates of interest you’re in credit. The market-leading Santander Preferred current account, for example pays 5% on balances up to £2,500 for the first 12 months. Based on a £1,000 average balance, you could earn £50 in the first year from this account. However, you must pay at least £1,000 into your account each month to be eligible. As an added bonus, you get £100 cashback if you switch your main current account using Santander’s switching service.

Wake up to your pension

A generation of Britons faces a cash-strapped retirement as people ignore or refuse to respond to the changing nature of pension provision in the UK, according to a new report from HSBC.

Slightly fewer than four in ten (39%) Britons have put a financial plan in place to provide for their futures and 68% are worried they are not financially prepared. Saving while you are young will give you financial freedom later on, so start saving into a pension as soon as possible.

If your employer offers you a company scheme into which they make contributions, you should join it. From 2012, many more people will have access to a pension at work, to help them save for their later years. Employers will have to enrol all eligible employees into a pension and make minimum contributions into the scheme.

But don’t wait until then to start thinking about the future – the sooner you start paying into a pension, whether personal or a company plan, the more time your savings will have to grow.

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Pay down your mortgage

Interest rates have been held at 0.5% for over two years now, but they are unlikely to remain this low for much longer, so you should take advantage of low mortgage rates by making overpayments now if you can afford to.

This will give you much more flexibility in the future if you want to move or remortgage, and can slash the amount of interest you pay overall.

For example, someone making overpayments of £50 a month on a £150,000 25-year repayment mortgage at a fixed rate of 4.5% would save £11,318.49 over the lifetime of their mortgage, and reduce their term by two years and six months.

And if they overpaid by £100 a month, they would save £20,148.30 over the lifetime of the mortgage and reduce the mortgage term by four years and six months.

You should check with your lender to find out how much you can overpay without paying an early repayment charge. Stay within that limit to avoid any extra charges.

Clear other debts

Sit down and go through your bank statement so you can see exactly how much you are paying each month to service credit card debts and loans.

Track down all your paperwork and find out the various rates of interest you are paying on your debts. Then look at how you can reduce the amount you pay. If you have sizeable debts it may be worth consolidating them through low cost loan. For borrowers looking for a loan of £10,000, the best representative APR available at the moment is 6.9% (fixed), which you can get from Alliance & Leicester and Marks & Spencer.

Over four years, the total charge for credit at this rate would be £1,425. However, you will not qualify for this deal unless you have an excellent credit score.

If your debts are smaller, move them to a balance transfer card such as the Barclaycard Platinum card, which charges no interest on balance transfers for the first 20 months, subject to a transfer fee of 3.2%.

Protect yourself

Once you’ve got your finances in good shape, make sure you sort out some protection so that if things suddenly change, it doesn’t mean your income will plummet. For example, you may want to consider payment protection cover which will pay out in the event you have to stop work due to an accident, illness or unemployment.

You should also build up your rainy day savings, so that you have emergency funds available if, for example, you were to lose your job or separate from your partner. Try to have a savings pot of at least three months’ your salary in place.

Regular savings accounts can be a good way to get started. Northern Rock’s Regular Saver account, for example, pays 4% annual interest provided you deposit between £1 and £250 a month.

Unusually for a regular savings account, you can make withdrawals, but you need to keep a minimum balance of £1 in the account. This account pays a competitive 4% annual interest to savers who have from £20 up to £250 a month to invest. Make sure you save between these amounts or the interest you earn plummets to 0.10%.

If you want easy access to your money, then the current market-leading easy access account is Nationwide Building Society’s MySave Online Plus pays an impressive 3.05% annual interest before tax on a minimum investment of £1,000.

While you can only make one penalty-free withdrawal a year, at least you know you can get your hands on your cash in the event of an emergency. This rate includes a 1.51% bonus for the first 12 months, so you may want to move your money at the end of this period.

Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.

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